Rainy Day Funds Eyed By Cash-Strapped States

When Democratic Iowa Gov. Tom Vilsack proposed using $120 million -- roughly half -- of the state's "Economic Emergency Fund" to help balance the budget, his opponents wanted to know: What's the emergency? "In my own mind, I would have a tough time justifying it as an economic emergency," said Senate Majority Leader Stewart Iverson Jr., a Republican. "It's different if revenue were declining by one or two percent. It would fix this year's problems, but it creates a $120-million hole for next year. What do we do then?"

Iowa's situation is one of several emerging cases in which states are turning to their savings accounts to balance their budgets. Decade-long tax cuts and rising Medicaid costs have caught up with state legislatures, as many now are tapping -- or considering using -- their "rainy day" funds to close the gap between outlays and slumping revenues.

All but three states -- Arkansas, Montana and Oregon -- have some sort of rainy day fund. These reserve accounts, also known as "budget stabilization funds," receive surplus revenue during healthy economic times. Most states bolster the funds annually expecting to use it them if and when the economy turns sour.

That's what (the funds) are there for," says Greg Von Behren, a staff associate at the National Association of State Budget Officers (NASBO). "It's for when fiscal situations begin to deteriorate."

And deteriorate they have.

After years of flush surplus and unprecedented growth, many states are experiencing a major economic slowdown this year that has forced cuts in programs, and has even sparked talk of tax increases.

In a February survey by the National Conference of State Legislatures (NCSL), five states -- Colorado, Mississippi, North Carolina, Oklahoma, and Washington -- indicated they would tap their reserve accounts. Another six states reported they might tap it. Corina Eckl, director of NCSL's Fiscal Affairs Program, said she expects more states to tap the fund before they finalize their budgets.

"The economy's kind of slowing down and this is what they're dealing with," Behren said. "They've given so many tax breaks that this is what happens."

Ray Hederman, a tax policy analyst at the Heritage Foundation, says "unfunded mandates" -- when Congress orders states to implement a program without providing federal dollars -- also have become a strain on state budgets.

"It's a combination of states cutting back on their taxes and ... unfunded mandates," Hederman said. "That's why you see so many states, their budgets are unbalanced."

Kentucky lawmakers said last week they will use $23.3 million from their Budget Reserve Trust Fund -- along with spending cuts -- to cover a $117 million budget deficit. Maine, which began using its rainy day fund as the state's cash pool in 1995, will do so again, effectively reducing the account's size from $143 million to $92.6 million in 2002 and $29.4 million in 2003. Nevada will use reserve accounts to cover a $96 million shortfall for the 2002-03 budget.

Other states, like North Carolina, are at least considering using their reserve accounts.

Withdrawing money from the "rainy day" fund is done when a state experiences a shortfall and needs more money to balance the budget. Still, politically sensitive lawmakers usually avoid doing so because they view it as a last resort rather than an option. States first look to cut services or find other ways to raise revenue.

"I get the sense there is going to be a political reluctance to announce to the world that you have to tap the rainy day fund because it shows that it's raining," Bob Zahradnik, a policy analyst at the Center on Budget and Policy Priorities. "A lot of people don't want to admit it's raining."

The size of rainy day funds varies state to state. How much each state should appropriate is also disputed. Some -- like Colorado and Indiana -- deposit a set percentage of their revenue, while others -- like Minnesota -- sets an exact amount according to statutory laws. Most budget analysts say the rule of thumb is to put 5-10 percent of yearly expenditures in the fund.

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